Profitable Insights into Financial Markets
With the iVC reports showing some preliminary promise, I thought it would be worthwhile to begin tracking any potential predictive ability of the grading system. It's late so it's likely I'll have to update this post with better prose after I get some sleep. See this week's pre-earnings grades below. The reports are available for sale through the shop.
I am bullish on FB because I believe the firm's strategic vision is sound and recent moves have put FB in a position to build on and maintain a competitive advantage well into the future. There are 4 keys to my thesis:
Facebook is the undisputed king of social media and still expanding.
FB has a total base of 1.2 Billion monthly active users. It's standalone acquisitions and apps have the following estimated users:
The last point regarding Whatsapp users is critical; 350 million users are active every day. This is the highest user engagement in the social networking space I am aware of.
FB's size and business model will allow it to achieve greater economies of scale. FB does not sell hardware, it does not sell phones or tv's. FB provides users users a method and platform to communicate and share experiences digitally, instantaneously, globally. I believe all of their acquisitions seek to bolster this user experience. FB sells businesses use of their platform to market and distribute digital ads, products, and services to targeted, engaged users. FB is investing actively in this area in an effort to help drive its adoption as the preferred corporate marketing platform on the web.
All this is to say their model is built on leverage. As their platform gains efficiency costs to run the core services should decline bolstering operating margins. Near term margins are likely to decline due to the recent acquisitions of Oculus and Whatsapp, which will require continued investment. However, this effect may be somewhat neutralized if FB is still growing revenues faster than expenses.
FB has just begun to monetize its ad platform.
I see evidence based on FB's revenue growth. Sequentially revenues grew at ~55% year over year with Q1FY14 revenues up ~72% compared to Q1FY13. This is incredible considering revenues are already closing in on double digit billions.
FB's platform has now garnered international credibility and support considering the Publicis deal which is estimated at $500 million. Instagram has just began monetizing its user base via ads within the last year. Whatsapp hasn't even started yet...
Furthermore, I believe the popularity of FB ads will increase due to the largely unobtrusive ad placements in newsfeeds. People love to complain about the data mining that FB has to do in order to provide its ad services but I've noticed the ads have grown more relevant and often appear similar to stories, news, or videos any one of your friends would share with you.
I believe this is a major catalyst that will lead to greater corporate adoption of the FB platform.
Whatsapp's potential value is much greater than 19 billion paid.
Ultimately a bullish bet on FB is a bullish bet on Whatsapp. It is my belief that most investors were initially stunned with the $19B purchase price especially considering Whatsapp had negligible revenues to speak of, no marketing, and a CEO and management team whose slogan is literally "no ads, no games, no gimmicks". I know because I was also stunned.
After mulling it over and modeling some scenarios the price tag seems wholly justifiable and could potentially be a bargain... First lets review the press release FB issued regarding the Whatsapp deal.
FB_Whatsapp Key Stats_Acquisition
These numbers are staggering. Using these data points as a foundation I modeled what I thought was a reasonable growth sensitivity table. (Feel free to download the model and input your own assumptions in the blue cells)
Click here for the free downloadable spreadsheet version
If FB is able to monetize Whatsapp's projected user base at the current $1 per user, the present value of those sales is ~1.1B. If we use the current industry average P/S multiple of 11x (large cap, internet information providers), then those revenues are worth an additional $12B in market cap or $5 per share. I believe this is NOT priced into the stock as FB has declined ~5% or ~$3.50 since the announcement on Feb 19, 2014. This is also aligns somewhat closely to my current DCF price target of ~$69.
The value of $42 per user implied by Whatsapp's purchase price may be bargain according to Forbes. I suggest you read the entire article as it presents an alternative bull case not being considered by the market.
CitingForbes:
...How can it be that WeChat's users are worth $231, Line's are worth $73, WhatsApp's are worth $42 and Viber's are worth $9...It turns out that an international user is only worth less than a Western user if you only sell ads. It all comes down to monetization of those users. The Asian messaging companies are vastly ahead of the North American messaging companies in terms of how they monetize...Unlike in America, where the only way we seem to monetize a consumer app is through shoving ads at us constantly, over there, WeChat and Line make money through selling stickers, games, and also buying things. For example, you can now pay for taxis and food in China through the WeChat app. In Thailand recently, Line did a group-buying flash sale which was incredibly successful. It turns out, if you aggregate the users, you can sell to them. Ads are not really part of this equation...
The mobile phone market is still growing faster than GDP:
The International Data Corporation (IDC) projects mobile smartphone growth is expected to decline from current year's estimates of ~19% to ~7% by 2018. This is straightforward as a growing industry projects as a tailwind even though growth is projected decline sequentially y/y. To me this implies increasing competition between hardware manufacturers and a bifurcation in the mobile technology industry. Incorporating this into my analysis the base case has the market growing above the commonly used 5% long term stable growth rate. This is critical for attracting continued investment flows.
This is the foundation of my thesis and as long as the evidence skews in support of this thesis I will keep looking to invest in FB.
Disclosures: I am long FB.
It's been a while since I've updated the blog and with good reason. Like any worthwhile business the foundation on which it's built must be thoroughly researched, well planned, and ruthlessly executed. With that in mind, I've been away building other pieces of the foundation which I will be unveiling over the next week or so. Be on the lookout for the upcoming BlackArbs flagship product titled the "iVC Report" (Identify Value Creators). This report is designed to assist retail and professional investors in their investment decisions by clearly identifying firms that create or destroy shareholder value.
The premise is simple; firms that create value always increase in value. Both sophisticated and unsophisticated investors are often confused about how to identify those stocks and as a result often make buy/sell decisions based on financial news media (awful), sell-side analysts (conflicts of interest), or their "gut" (erratic, emotion based). This report will help you cut through the profit destroying nonsense and provide the framework to improve the quality of your investment portfolio.
I will also be adding detailed valuation models as an add-on product in the next few weeks to further fortify the iVC report and BlackArbs' product offerings.
Also take note, I practice what I preach and use the iVC reports in all my investment decisions which has lead to risk adjusted outperformance compared to the S&P 500 over the last 2.5 quarters. As a result, I'm in the midst of constructing a core portfolio based entirely on my iVC reports and valuation process that I will update, track, and post so my current readers and prospective clients can follow along and see the results in real time.
I'll keep this short and sweet. 3d systems is still the undisputed king of the mountain in the 3d printing industry. They generate more revenue, more gross profit, more operating profit and more net income than all their competitors. See my updated report which includes their most recent 3rd quarter results and additional analysis.
...the Fed stops buying Bonds. It's as simple as that. The Fed has committed to purchasing $45 billion in treasuries and $40 billion in MBS per month for the foreseeable future. That's a run rate of ~1 trillion a year! The "Fed put" is real and I can prove it. Look at the following chart.
US Federal Reserve Total Assets data by YCharts
The plot starts on 11/25/2008 or the beginning of the first Quantitative Easing program (QE1). We can see there is a clear relationship between the Federal Reserve's balance sheet and the broader market (S&P 500). In fact the the correlation is ~92%. Furthermore notice that during periods where the Fed balance sheet has stabilized, the S&P experienced higher price volatility.
Chart number 2 plots the S&P 500 index level against the Fed asset level using data points from 11/25/2008 to present.
Notice the linear relationship between the two. In fact I ran a simple regression model which produced an R^2 of ~86%. That means ~86% of the variability of the S&P 500 price level is explained by the size of the Federal Reserve's balance sheet!
Simply put, if the Fed is continuing to to buy bonds and increase its balance sheet then keep buying stocks! My R code is provided below.
AFFILIATE LINK
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